How to deal with "illiberal" corruption?

Two issues keep the debate around the new Multiannual Financial Framework (MFF) going: one is about how to find a mechanism to react to governments which do not comply with the Copenhagen Criteria, i.e. infringe democratic and/or rule of law principles (the infringement of democratic principles is more indirect as the sheer outcome of elections favours the governments of Hungary and Poland - although in Poland the tide may turn - but the circumstances under which these governments win the votes are at least dubious) without resorting to the famous (or rather notorious) Article 7, which is rightly called the "nuclear option" as it is very strong and virtually impossible to implement. It has to be noted also that this "nuclear option" is not directly so nuclear as it strips a country from its voting rights but leaves all other right untouched - of course after this the other member states can vote other sanctions if they are in line with general law.
The other question is also raised in the context of the projects in Hungary where the government is distributing EU funds with an extreme speed - leading to suboptimal decisions in itself - and favours its cronies in this distribution.
As it seems that - at least in Hungary - these two negative phenomena go hand in hand - and the concentration of power and hollowing out of all checks and balances really ensures that cronyism and corruption cannot be brought to court or hindered any other way, including wide publicity, the two questions are mixed together.
Proposals are tabled which would make EU funds conditional on rule of law criteria. In terms of proper use and avoidance of fraud, joining the European Prosecutor's Office is favoured. On the other hand, soon a new Financial Regulation will be voted which will simplify the disbursement of EU funds.
EU structural funds are an important source of economic development, a positive factor in the image of the EU and also help cohesion between the countries (also by enabling that their economic development approaches them to each-other - they are also called cohesion funds). I totally agree with Markko Markkula, president of the (European) Committee of the Regions, who emphasised the importance of these funds in an interview already serving as a preparation to the fight around the new MFF, arguing that the cohesion funds should not be cut. A recent article (and one of a leading Hungarian commentator who can also not be suspected of being on the side of the present Hungarian government, arguing that austerity will not break the government of Orbán) warns that the cut of funds can be counterproductive.
So what?
My proposition is that the decisions (including acceptance of projects and procurement) should be more centralised and also more controls should be applied, covering the cost of these from the funds made available to the country in question. These controls should also depend on whether the coutry joins the European Prosecutors' Office.
This would of course require additional resources which is always difficult to achieve but even more difficult now when EU sources are decreasing due to the Brexit. Therefore the structural funds should be used for this purpose. This would not be such a sensitive cut as what is proposed in the framework of the new "conditionality" proposals. Also, joining the European Prosecutor's Office should be the precondition of applying the simplifications in the new Financial Regulation.

What does the Hungarian minister of the national economy (including finance) know and understand?

According to a press article,the minister of the national economy, Mihály Varga (this superministry integrated or rather melted into itself the finance ministry, ministry of economy, labour and the different sectoral ministries - foreign trade, commerce, industry etc.) declared that the Hungarian government will not follow the recommendation of the European Council (it is prepared by the Commission but descussed in the Council and signed by the president of the Council) to cut tax benefits to poor people. Apart from the fact that low earners in Hungary have no special tax benefits (they were abolished by the FIDESZ government to cover partially the costs of the flat personal income tax), the article states that Varga confused the tax wedge with the tax benefits as the coutry-specific recommendation to Hungary proposed to decrease the tax wedge for low earners (see point 3 on page 7). Actually the document complains in an earlier paragraph (number 12 on page 5) that the" tax wedge on single low-income earners is one of the highest in the EU". Probably Mr Varga should have read the Hungarian version. There, the translator (who knows why, certainly not fearing misunderstanding by an economist and economy minister) translated the tax wedge to "tax burden" (pages 5 and 8 as the Hungarian text is somewhat lengthier).
The recommendations are denouncing the sectoral extra taxes (with the following justification: "The application of different tax rates across sectors is an obstacle to the effective allocation of resources
and thus negatively affects growth" and recommend a more equitable tax system. This is no surprise. No surprise either but very instructive are, however, some other statements about the situation of the economy and about economic policy: "Notwithstanding the Central Bank's subsidised 'Funding for Growth' scheme for small and medium-sized enterprises, normal lending to the economy has not picked up in a sustainable manner." (see also in Hungarian: Why the "funding for growth" programme did not help?)
"The regulatory burden on the financial sector has been
further increased, thus limiting the capacity for capital accumulation. Measures like
the increase of the financial transaction duty have contributed to a pick-up in the cash
usage of the economy. The household portfolio has further deteriorated and the high
proportion of non-performing loans currently represents one of the biggest
challenges for the financial sector. Portfolio cleaning is hindered by the weak
efficiency of resolution proceedings."
Also interesting: "The youth unemployment rate has decreased in 2013, while the rate of young people who are not in employment, education or training has increased." -  hints to the phenomenon often discussed in the Hungarian economic press that employment figures may hide more than reveal the real processes. "The Public Work Scheme attracts the bulk of budgetary resources available for employment measures, but in 2013 less than 10% of its participants were able to return to the open
labour market after exiting the scheme."
"The business environment in Hungary is characterised by frequent changes in the
regulatory framework and limited competition in an increasing number of sectors.
New barriers have been introduced in the services sector and existing ones have not
been removed (e.g. pharmacies, waste management, mobile payment, retail tobacco
and textbooks)."
"Overall investment has declined particularly strongly in those sectors
where sector-specific surtaxes have been imposed in recent years. Between 2010 and
2013, nominal investment declined by 44 % in energy, 28 % in finance and 18 % in
the communication sectors, while increasing by 3.4 % overall."

And so on, and so on. So if after this, the minister of national economy says that Brussels does not require adjustment any more, obviously concentrating on the budget balance (in fact this is also a little false as the recommendations state: "Reinforce the budgetary measures for 2014 in the light of the emerging gap of 0.9% of GDP relative to the Stability and Growth Pact requirements, namely the debt reduction rule, based on the Commission 2014 spring forecast. In 2015, and thereafter, significantly strengthen the budgetary strategy to ensure reaching the medium-term objective and compliance with the debt reduction requirements in order to keep the general government debt ratio on a sustained downward path."), he forgets his role beyond being the minister of finance, to be very polite. For the uninitiated: a lot of criticism and recommendations target the governments pet measures, denounced also in Hungary even by economists who supported FIDESZ before.

There are problems also in the social area (another superministry is the Ministry of Humnan Resources): "The proportion of early school leavers is on the rise and the adoption of an early
school leaving prevention strategy has been repeatedly delayed." - and this in the context when compulsory upper schooling age has been decreased.

A final quote: "Review the impact of energy price regulation on incentives to invest and on competition in the electricity and gas markets. Take further steps to ensure the autonomy of the national regulator in establishing network tariffs and conditions. Take measures to increase energy efficiency in particular in the residential sector." - Another pet project, the "decreasing utility charges" is under attack. If we look what was written above about the investment scenario, we see why. The criticism of the public procurement system is very diplomatic, but sstill, recommends improvement. THis would, however, stop the government from distributing public work contracts to its cronies. No surprise but very sad that the minister shows himself deaf.

"Suspension or no suspension?"

The tenth anniversary of the "big bang" enlargement and thus the accession of Hungary was also marked by some controversy. Some Court decisions against Hungary in infringement procedures (I will return to these later) and a controversy about disbursement of EU funds. So let's now speak about this and return to a summary of these ten years later.

The European commission is asking for additional information on the new system of managing EU funds in Hungary and asked the Hungarian authorities not to send new requests for disbursements (invoices) to the Commission before the workings of the new system is clarified. This is not a suspension of payments in the sense that payments on already submitted claims are going to be done. It is quite logical, these funds were disbursed under the old system which was working in a way (according to information from OLAF, there were twelve cases where OLAF proposed further follow-up (which can mean criminal prosecution, recovery of amounts paid or disciplinary action). The situation is that OLAF cannot directly take disciplinary action or initiate prosecution, it is up to the national authorities do it. The low percentage of criminal charges brought by the national prosecutors against fraudsters embezzling EU funds was the reason why the Commission proposed to set up a European Prosecutor's Office which would bring in these charges.

The Hungarian change came – and this shows the ignorance or lack of political feel, or even worse, lack of interest or understanding towards European developments – at an inopportune time: the Commission was strongly called upon in the report of the Court of Auditors and the discharge resolution (which accepts the report on the previous year and evaluates the management of the EU budget) by the Council and the Parliament to do more to tackle the loss of EU funds due to irregular and/or fraudulent claims for reimbursement submitted and not controlled by the member states.

The background is that while administrative expenditure and in general expenditure areas where the Commission directly spends EU money, get since years a "green" mark from the Court of Auditors, meaning that error rates are below the 2% materiality limit, i.e. are in the normal range, in the area of agricultural and structural funds, there is an error rate which is significantly beyond that. And the reason is that the member states' implementing and audit authorities do not provide the assurance requested that this spending really happens also in the quality expected. Unjustified costs are paid, documentation is lacking or erroneous affecting more than the (in)famous 2% (the materiality limit of 2% means that this is the level of errors which is considered a level where the cost of introducing additional controls is exceeding already the savings (improvement) which could be expected from them, and therefore this level of error is considered as inevitable). It can be disputed whether this level really is at 2% (some suggest it may be higher in complex areas), it is commonplace, however, that the authorities of the member states are too lenient towards their beneficiaries – among others because beyond the obvious economic interest, there is a political pressure to spend the funds assigned. This is evidently visible in Hungary, where the slow catch-up at the start makes the rate of spending an obvious target, in particular as the negotiations on the 2014-2020 financial framework did not result in a spectacular success for the government, so they want to differentiate themselves from the previous government by spending better.

So the Commission is finally planning to introduce a stricter monitoring and re-auditing of the implementation of EU funds by the member states, and it was in this process when the announcement by the Hungarian authorities to further centralise the implementation system and eliminate some actors in it came. And it is clear that at least a side-effect of this (if not the objective) will be less hassle – which would be nice if it would eliminate administrative hassle and unnecessary complications, on which the Commission is also working – and a quicker spending. This, however, entails more risk of irregularities being left unnoticed. And this risk – and weakening of the control system - the Commission cannot afford when its main task is to reinforce controls. Had the Hungarian decisionmakers taken this into account, we were better off now.

Let's carry on - on the EU budget

Everybody likes to get money. But not too many like to give. The masters of the EU (who are, contrary to common belief, still the member states) gave the Union a moderate financial framework (this is how the long term budget is called in EUspeak) and 2014 budget. The negotiations were relatively successful for Hungary - it remains the second-third most supported country in terms of net balance per capita or by share of GDP. So now the Hungarians should be happy, shouldn't they? Well, the EU funds are well "earmarked", at least the area where they could be spent, is defined.You cannot spend European Social Fund money for economic development or infrastructure, only if there is a social benefit, and cohesion funds also have certain goals to be adhered to and also limitations. Rules of spending, documentation and accounting are not so simple. Partly this is due to the conditionality, adherence to which has to be checked. There is, however space for simplification. Increasing the flexibility in using the funds both concerning eligibility criteria and administrative requirements in beneficial but this should be done in a way that the possibility of fraud should be avoided. On the other hand, in spite of the short-term temptations, the real interest of the country is to prevent that EU funds should be used to distort competition as on the long term this means loss to Hungarian competitiveness to richer countries. Hungary is interested in simplification and also in decoupling the EU budget from conjunctural changes and spirit fluctuations between member states, thus also in giving the EU genuine own sources, for example from a future financial transaction tax or energy tax. This has nothing to do with the extraordinary taxes introduced in Hungary and probably would require their abolition which would actually help the Hungarian economy. Work is in progress and finally sme member state control and also mechanisms to equalise temporary fluctuations can be expected. The condition of agreement of the European Parliament to a decreased budget was more flexibility in reassigning funds and also a review to see if increases are necessary. Hungary should carefully follow this review and support an increase in the budget - improvement of economic conditions can be expected and thus more could be made available - benefiting the recipient countries, Hungary among them. Inevitably there will be a question, what the additional funds should be used for. Part of the funds was made available already to the youth employment programme - if more Hungarian regions could benefit from increasing its amount and lowering the threshold where it can be used, it would address a burning problem.

Storms

Demonstration near to the National Museum in Budapest two days after the day of independence when - according to legend - the national poet of Hungary (Petőfi, born Petrovics) declamated the National song on the stairs of the Museum, Snowstorm on the roads (that's wha the demonstration was postponed), storms all over Europe and the U.S. around the fourth amendment (how classical this sounds) of the Basic Law of Hungary, The forint plunging in response to - not the nomination but the first measures of the new president of the Hungarian National Bank -. ANd the European Peoples Party invites Frigide Barjot (no typo) to perform before the press conference of Commission vice president Viviane Reding (who, by chance, belongs to the same grouping) ti express herself against the marriage of homosexuals which is just being admitted in France. These storms on the surface hide undercurrents which have more importance for the future. The European Parliament - including the majority of EPP MEP's votes against the compromise long term budget agreed between the member states (but fails to request an increase). Good news: a compulsory mid-term review with qualified majority voting which could mean that a minority of member states cannot stop the EU adjusting its budget to the - hopefully - favourable future economic conditions. Greater flexibility, real own resources are the two further demands and a fourth one, which is in fact an increase in the amount: settling the backlog between commitments (promises to pay) and payments, which grew every year as payment budgets were always lower that commitment budgets. In a time of continuous growth of the budget, this difference would cause no trouble as payments are also later than commitments and thus the increase automatically means that payments - coming partially from commitments in previous years - can be somewhat lower that commitments in any given year. But if the difference is bigger than covered by growth, or there is no growth, the situation aggravates. Meanwhile, a bail-out is agreed for Cyprus. 10bn EUR instead of 17bn, a further 6bn is to be covered by the depositors of Cypriot banks vie a tax on deposits which averages about 6,5%. The European Federalists Party and the blogger of Reuters are enraged. The Parliament did not have a say (well, the national Parliament of Cyprus will have, and Cypriots already staged a run on their banks), they complain. It must be admitted, it is an unorthodox move. But if we think about the methods other governments (whether bailed out by the EU or not) put their budgets right, it is a song. In Hungary, inflation is 6% per year - the same toll on the value of deposits, just to talk about us. Of course, this tax is just a one-off solution (or will it be annual? I doubt). But it soothes to some extent the "northern" citizens who are already very sour about "their money" bailing out "irresponsible" southern states. And, given the composition of Cyprus deposits, it may be well targeted to some who hid their fortunes there.

Youth guarantees

There are two European countries, Austria and Finland which guarantee, that if a young person is unemployed for four months, he/she should get a job, traineeship or re-training offer. This is basically different from the public work which is now the favourite job-creating tool of the Hungarian government. On proposal of László Andor , the commissioner for employment, social affairs and inclusion, the new Multiannual Financial Framework will contain a new youth employment initiative (this was the only addition to the proposal of the Commission on the European Council meeting which approved the Council position on the MFF the 8th February (see criticism about the deal and its enthusiastic reception in a Hungarian article ). And these 6 bn euros can also be used to establish this guarantee as the Council agreed the 28th February (see here . It will be used in the regions where youth unemployment is the highest. The youth guarantee initiative also has a Twitter stream. According to estimates by Andor, the programme would cost 20 billion Euros in Europe. This would mean proportionally 50 billion HUF in Hungary. Thus roughly the amount which has been just taken from the universities or less than half of the interest difference between market financing and an IMF loan (by the most conservative estimates). Further information about the Council negotiations on the MFF is available here while the European Parliaments position can be followed here . A third-party report about the presentation of Mr Van Rompuy and the responses to it shows the main controversies.

Salaries of officials

The fight around the EU budget and the salaries of eurocrats continues. It has yielded some very interesting side-branches. A huge proportion of the EU budget is going back to the member states, although not to those who pay them in (The Guardian tried to set up a flowchart showing where the money goes but of course the euros (and pounds and kronas) are not earmarked. However, there are net payers (the richer countries) ant net recipients (who actually spend a significant part of the money received in the richer states), as one aim of the EU is to equalise the level of development in its members - out of solidarity but also out of plain self-interest. No one of the states will openly tell another one "I do not want to pay for you" although citizens and some journalists - in particular in the context of the debt crisis - do say things like that.

So what remains is the administration. Without echoing the allegations of the staff unions who see an intention to weaken the European public service, and without denying that efficiencies can be gained (where can't they?), this endeavour is not well placed in the eyes of an impartial observer (which I am not). The 2004 reform brought huge savings and the Commission is now proposing a further cut of 5% in staff numbers (and to reallocate staff internally to fulfil new tasks coming from accession, the economic governance package and a number of other projects aiming at competitiveness for Europe, research, etc.) as part of a wider package to cut other benefits of the officials (which are fixed in a regulation voted by the Council and the European Parliament). Negotiations on this proposal stalled as the member states did not accept the proposals. The EU budget is about 1.3% of the total GDP of Europe and administration is less than 6% within this. So big savings cannot be expected.

Salaries of eurocrats seem to be a stumbling block. In 2004, a special levy (starting at 2.5% and increasing every year till 5.5%/ was introduced on top of the taxes and social security contributions paid by the officials. This was tied to a method of calculating the annual salary adjustments. This method tied the increase of the salaries to the increase of salaries of public servants in the richer member states (to avoid that the increases in the member states due to higher inflation and the catch-up effect, as salaries there were lower than in Western Europe, should result in a higher increase). Of course the data have first to be available and so the changes take effect a year later. So after the crisis, there was still one year where the salary increase fell out higher than the member states thought justified (surprisingly, not in 2008 but in 2009) and then the member states did not want to apply the algorithm, referring to an exception clause in the regulation, for the case of an unexpected and serious crisis. The Court of Justice later found that that year the crisis was not sudden and not severe enough in its consequences to justify the application of the exception clause. The year after the cut in national public salaries had its effect on the calculation and the 0.1% increase was approved by the member states. The year after, they refused to apply the method again, and similarly in 2012.

Meanwhile, the method of salary adjustment and the special levy expired (they were tied to each other). The Commission proposed to extend these two elements of the staff regulations for another year, independently from the status of the negotiations on the budget and the Staff Regulations. The Council refused that which meant that the special levy (which gradually increased to 5.5%) also expired and all officials of the European institutions got a salary increase of about 5.5%. This was pinpointed in a number of articles in the press. One of them got a surprising reaction from a European Official who stated that he/she is a secretary and earns 700 euros a month. As the salary table of the officials is public, it is easy to establish that this means at least a grade 8 official. Given that secretaries start at grade 1 and the average time to jump a grade is 3-5 years (in reality, it can be longer), this means that this person works in the EU since 20-30 years and is still a secretary. Draw your own conclusion. If you want to see the Staff Regulations, you can find it here

By the way when member states - and in particular David Cameron, outraged about EU salaries compared to his own - complain about 1-2% of salary increases and "perks" of EU officials, Commonwealth officials received a 3.8% salary increase and have much more sumptuous perks - but this is Britain's favourite child, as opposed to the EU.